How ACH transfers work

Last year, more than $41.6 trillion were transferred using the ACH network, totalling more than 24 billion electronic payments. An ACH transfer is the lifeblood of the Automated Clearing House system. It allows individuals, companies, and other entities to move money between accounts directly from bank to bank.

What is an ACH transfer?

An ACH transfer is any electronic movement of money between banks that uses the ACH network. The network is widespread: 83 percent of businesses use ACH in some capacity. ACH transfers were first developed as an electronic alternative to checks and have since outpaced that form of paper payment dramatically. Moreover, the usage of ACH transfers is rising: 2015 saw 5.6 percent more ACH transfers than the year before.

There are two kinds of ACH transfers: debit transactions and credit transactions. While both are free to use (except for third-party processor fees), the difference comes in whose bank initiates the transaction: the originator’s or the recipient’s.

A debit ACH transfer occurs when money gets subtracted from a user’s bank account. For example, this kind of ACH transfer can happen when a customer sets up a recurring loan payment, and the lender debits the predetermined amount from the customer’s account every month. Another example is when a merchant charges a customer through an app like Venmo, and the money is pulled from the customer’s bank account. Debit ACH transactions require a customer to provide his or her bank account information so that the funds can be pulled from their account.

A credit ACH transfer occurs when money is deposited into a user’s bank account. For example, a credit ACH transfer happens when an employee receives a regular paycheck via direct deposit. The paycheck is deposited into his bank account using an ACH transfer. Credit ACH transactions do not require a user to provide his or her bank account information to a third party, because the user is controlling the funds from his or her own account.

ACH transfers can be peer-to-peer, business-to-business, or business-to-consumer. ACH transfers usually take a couple of business days to settle and appear in the recipient’s bank account. For merchants, accepting payments via direct ACH transfers is often much cheaper than via credit cards or even PayPal, due to those systems’ additional fee structures.

How much does an ACH transfer cost?

Part of the appeal of ACH is in its comparative affordability. ACH transfers are typically free for transactions between peers or for businesses. For merchants or small businesses relying on third-party processors to access the ACH network, there may be a small cost. Third-party ACH processors may charge a small fee for the ACH transfer, which is typically either a flat rate less than $1 or less than 1 percent of the transaction. Some banks may also charge individuals a small fee to make a credit ACH transfer to an external account at a different bank. Even so, the fees for accepting an ACH transfer are far less than what a business would pay to accept a credit card transaction, which is usually around 3 percent.

How does an ACH transfer differ from a wire transfer?

Wire transfers are different from ACH transfers, even though both move money electronically from one bank account to another. ACH transfers are processed in batches; in other words, a batch of various ACH requests is held at an Originating Depository Financial Institution (ODFI), and at specific times throughout the day, the ODFI sends batches through to an ACH Operator like the Federal Reserve. From there, the requests are sent on to the recipients’ banks. Processing requests in batches slows down the process, and that’s why ACH transfers can take a couple of days to settle. (For more detail on how ACH transfers are processed, read our in-depth explanation.)

By contrast, wire transfers are handled individually and immediately—no batching is involved. Instructions about the amount of money and the accounts involved are sent and cleared over a separate wire-processing system. The money is usually transferred within a few hours of the request. Because this system is much faster than ACH, and because it involves some additional legwork at the banks on each end, domestic wire transfers usually cost between $20 and $30 to send, and sometimes around $10 to receive. International wire transfers cost upwards of $40. This makes wire transfers far more expensive than ACH transfers, but wire transfers are particularly useful when time is of the essence.

Another difference is that wire transfers can’t be canceled. ACH transfers, on the other hand, can be disputed for three reasons: the ACH transfer was never authorized by the account holder; the ACH transfer was processed earlier than it was supposed to be; or the amount of the ACH transfer is wrong. This can cause issues for some businesses, who lack visibility into when an ACH transfer is final.

An ACH transfer is an effective and inexpensive way to transfer money between accounts, especially if the recipient can afford to wait a couple days for the ACH transfer to settle. The annual growth in ACH usage proves that ACH transfers are becoming an increasingly useful means of moving money.